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tv   Studio 1.0  Bloomberg  October 19, 2014 9:30am-10:01am EDT

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>> it has been called the harvard of silicon valley. y combinator is perhaps the most prestigious startup incubator in the world. it has funded 700 companies including dropbox, airbnb, and stripe. behind it is a couple with their own startup story. how did they build y combinator into what it is today? joining me on this edition of "studio 1.0," y combinator founders and husband-and-wife paul graham and jessica livingston. thank you for joining us. paul, it has been six months
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since you stepped down from the helm. how is it going? >> it is so great. i wish i had done it two years before. it was hard running y combinator. i'm not really an administrator. y.c. had gotten big. i was never suited to it. >> you would get your brain back. did you get your brain back? >> yeah. i had, this afternoon, the best conversation i've ever had. i had lunch with patrick collison. 100% was about ambitious plans. that is like the best possible office hours. >> how involved are you, jessica? >> i'm still very much involved i'm doing all of the same things i used to do. i miss working with paul but i also love working with sam.
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>> he was the founder of one of your first companies. when you stepped down, there were people who said he is not cut out to be you. >> it is a good thing. i was not cut out to run something as big as y combinator is now. >> is sam going to be better? >> they're going to be different. sam brings a lot of things to the table that neither of us had. which is this amazing amount of energy and patience that is needed to broker deals with investors. y combinator is doing a lot of different things. >> i want to talk about each of you and where you came from. where you grew up, your parents. >> my family came here from england when i was 3 1/2. and we lived in pittsburgh. my father worked in the nuclear business.
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when you design a nuclear reactor, he figured out if it was going to explode. >> what kind of kid were you? >> i was a bad kid. half the kids in my neighborhood were forbidden to play with me. >> what did you do? >> i was always, always getting in trouble with everybody, constantly. i was suspended from school i think at least once every year from like first grade to 12th grade. >> and then you got into computers. did that help? >> they really didn't teach computers in school. it was something you did on the side. >> when did you start coding? >> i think when i was 15. on an ibm 1401 with 12k of memory. >> you went on to harvard to get your degree in computer science, also your phd. and you took art classes. >> i never knew what i was going to do. it was always a mess of random accidents. >> jessica, what about you? >> i grew up outside of boston, and i was an angel.
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[laughter] i grew up with my father and my grandmother, his mother. i had a very happy childhood and friends wanted to play with me. i knew i liked to write, but i had no idea what i wanted to be or what i wanted to do. >> you ultimately ended up at a boutique investment bank. were you technical? did you ever learn to code? code? >> i never learned to code, and i'm not technical in the least. someday when i retire, i'm going to learn to code, but i was interested in it. >> before you started y combinator, you started another company. tell me about viaweb. the idea was revolutionary. >> the reason the company was called viaweb, the company worked via the web. it was what is now known as a web app. it was an online store builder and got bought by yahoo!. eventually became and still is yahoo!'s store. >> what was it like working at yahoo!? the guy who was suspended every year.
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>> i was getting suspended from yahoo!, too. i apologize to the people i ever worked for. i barely lasted a year. >> you went on to write. >> yeah. >> and you started building your following. what were you writing about? >> writing about software and i realized that no one would drag me away if i started writing about other things, too. >> at what point did you guys meet? >> at a party in paul's house that i almost didn't attend. >> y combinator almost didn't exist. >> scary how close. >> how did you come up with the idea for y combinator? >> jessica was interested in startups. she was writing a book. >> that was the first book that i read when i moved to silicon valley, your book about founders. >> really? i never tire of hearing stories about that. i was fascinated by all the stories i heard from these guys.
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and you did the talk at harvard. >> became the essay how to start a start-up. one of the things i told them was they should raise money from people who had gotten the money from starting a startup. then they could get advice. they were looking at me expectantly, like baby birds looking at their mother. and afterwards, i felt sort of bad because i had thought i was going to do angel investment, and i hadn't gotten around to it because i didn't know how. i thought, i'll do it and start doing angel investing. it wasn't supposed to grow into this big thing. this is one of the things we tell founders. the best way to start a startup that is going to take over the world, just start a start a -- just try and start a project you think would be cool to work on. y.c. was an instance of this. >> how did you come up with the y combinator? >> the original name was cambridge seed. >> we were in cambridge. >> the y combinator is a trick, which is a formal expression to a math concept.
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>> how did you decide to work together? you were not married yet? that is a big decision. >> it was -- it was scary. we were only dating for a year. ♪
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>> there are myths about so many of the great companies, start-ups, founders that are boiled down into legends and what is the myth of y combinator and what is the reality? >> people don't realize how much we were not interested in making money. of all these people saying on all these forums, all self-serving, we weren't trying
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to make money. >> it was an experiment to see if these new ideas could work. >> a lot of people think of it as paul graham's y combinator. >> there is a myth. >> you call jessica the secret weapon. >> nothing has happened that -- at y combinator that jessica did not like set her seal of approval on. she has veto over everything. >> this is the first time you guys have been interviewed together? >> yeah. >> i can't believe that. >> let's face it, i'm not as interesting as you. i don't make colorful remarks. i've chosen to be behind the scenes. i'm more comfortable behind the scenes. i like running things. >> that is why she is the secret weapon. she has perfect pitch for character. she can talk to somebody and fairly quickly tell whether they are a good person or not. >> tell me about the first class, eight companies, but you
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didn't know if anyone was going to even apply, right? >> we had no idea if people were going to apply. we had a few hundred applications. >> the most critical innovation of t.c. was to fund a bunch of start-ups at once. it is great for the investigator and for the investors because they have colleagues. it is so lonely and it has some of the advantages of being part of a company without the disadvantages. >> at what point did you decide to take money from investors? >> when we had to, frankly. i ran out of money. and it takes -- god, how long does it take? we don't even know how long it takes for the big exits. 10 years maybe. >> going into your 19th funding cycle. what do you consider the most successful? -- successful y.c. companies? >> it is pretty much the ones with the highest evaluations. airbnb, dropbox and stripe.
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>> did you know early on they were going to be hits? >> we knew the founders were good. >> what was it about them? >> different things. different things about the two of them. in drew's case, he was the guy who could write this software. dropbox suceeded by solving an almost impossibly hard problem. airbnb is different. it is this mass movement where people are staying in people's house worldwide. >> we were skeptical and i remember thinking we don't remember what the idea is. these founders are awesome. we're funding them. >> patrick from stripe, i have known him since he was 14. back when he was a high school kid in ireland. he used to email questions about programming language, and i had no idea he was a kid. >> now these companies are worth billions of dollars, if you look back, would they have sold?
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>> if someone came along with a big enough offer at the right moment, they would have taken it. we know with drew, in the y combinator application, we used to ask if someone offered you money, what is the least you would take. i think drew answered a million dollars. it was convenient that no one wanted to buy dropbox early on. >> now that you've been doing this so many years, can you identify the future dropboxes and airbnb's earlier, sooner than everybody else? >> we might be able to identify them better than other people, but there are limits to how well you can identify them. there's a good deal of luck. if you had to boil it down into one word what you are looking for, it's authentic. you're looking for people who are real friends, not people who got together for purposes of a start-up or in it for the money. zuck's not in it for the money and that's why he turned down the acquisition offer. withotu that -- without that, it wouldn't be what it is today. >> how was the interview process evolved? >> 40 minutes. >> 40-minute interviews and now
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with 10-minute interviews we don't have a pitch. >> how can you really know? >> you can't know for sure. after each minute, how likely are you to change your mind. another 10 minutes, you might change your mind 2% of the time. >> what is the average valuation of all of the y.c. companies? >> the valuation is $30 billion. >> what's your stake? >> all the money is in the few big hits and you have to ask what percentage you end up -- end up with after dilution. we assume it will be end up being 3%. 3% of 30. i have never done this. >> $900 million. >> until you asked me that, i never multiplied those numbers together. >> an article said sequoia has made more money on y combinator than y combinator has.
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and your policy is you don't make follow-on investments, right? >> yeah. >> would you consider changing that policy in order to make money off the hits that you pick? >> we never say never. the problem with that is there is a signaling thing. if we are going to do follow-on investments, that would hurt the founders who are probably great investment opportunities but we didn't choose to do a follow-on with. >> does it bother you sequoia has made more money? >> no. who cares? >> i'm happy for them. >> y combinator has gotten so much praise and a lot of criticism. why do you think it is so
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controversial? >> one of the most surprising things as y combinator became successful, the more famous something becomes, the more people want to attack it. to me. -- >> it's always been a mystery to me. every night i go to sleep, i think did we help the founders today and the answer is almost always yes. >> she goes to bed and says why are people saying mean things about us. it's so not true. >> you think investors have tried to stab you in the back? are they jealous? >> there are some things you can't believe someone is going to do that to you. i don't know why. it probably boils down to money and power. i don't know. >> one thing that people have said to me is that, well, why invest in 700 companies, there is only a handful of hits. is that a good track record? >> a couple hits or no hits. those are the only two options. >> are y.c. companies overvalued? >> maybe. maybe all startups are. i have heard investors claiming that y.c. startups are 2 times overvalued. that's the greatest compliment. we can take people into yc and if nothing else, they would get twice the valuation they would have had otherwise.
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>> is it a good thing if they are not worth it? >> if it is worth it, it is a bargain. >> i know something that jessica has said a lot about, not admitting enough women. is that true? >> we don't have enough women applying. we are making an effort in trying to do. we don't ask on the application what someone's gender is. we're trying to get the word out there that someone should be starting start-ups. we hosted a female founders conference where we bring successful female founders and tell their stories to inspire more women. >> some of the words that people use are harsh. they call y combinator a frat house. how many women have you founded? -- funded? >> in the past were 4% were female and now it's more like 12%.
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and that's not where we want to be. but it is moving in the right direction. >> how do we get more women -- women founding, women sergei? >> examples are what makes everyone to start start-ups. >> how have you changed the interview process to make sure you are getting the best people? >> one thing that has changed is we have a female partner in the interview rooms. >> why not blind screen everyone? >> i couldn't observe their interaction. ♪
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>> you've got two kids. what kind of parents are you? >> paul is the best father i have ever met.
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i'm going to say that because you wouldn't say that yourself. he spends so much time with them, teaching them, exposing to things, rarely seen that other fathers have done. i lucked out. >> how do you manage being married and being colleagues? >> it always worked really well. >> really easy. we never disagreed on anything. >> have you ever fought about y combinator? >> no. >> i don't believe it. >> it's really true. and the secret is the same secret for co-founders in general, you have different responsibilities. each person is in charge of their own thing and they are experts in that thing. >> what is the hottest thing about a y combinator company we don't know yet? >> boosted boards. >> why boosted board? >> they have bigger ambitions. -- bigger ambitions than making skateboards. >> what is the biggest fire you
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had to put out? >> at least one a week of co-founder disputes, that and fundraising, interactions with investors and investors mal-treating the start-ups. we intervene. >> how do you protect a start-up from its own investors? >> you don't have to make explicit threats. you just sort of say, come on, guys. be nice. but the investors know behind that, if you don't, we won't send any more start-ups to you. >> if you don't, all of the y combinator founders will know about it the next day. >> biggest regret? >> it is a bit grim. but very easy to say what my biggest mistake is. >> i'll do my answer. my biggest regret is i kind of
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squandered my college education. i didn't learn as many things as i could learn or work as hard as i could have and i compare myself to the founders, who are doing so many interesting and ambitious things, and i kind of squandered a little bit of my youth. >> paul? >> i have to say it very carefully. so i can remain in control of myself. remind your parents to be screened for colon cancer. >> i understand. my father passed away. there are many things i would like to tell him. and do for him. >> colon cancer. if they catch it early, it's so preventable. you've got to make them get screened. >> what is next? is yc it? or will there be a second act
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from paul and jessica? >> i'm fully just as enthusiastic about y combinator. as the day we started if not moreso. we are doing so many exciting things. >> now it actually seems like a good idea. >> how about you, paul? >> i'm going to go back to writing. that was what i was doing before y combinator. that is what i was always hoping to do. >> how do you guys want yc to be remembered? >> i want us to still exist. i want yc to be this institution that persists for a long time. it could last a lot longer than a product company does because structurally it is like a university. it could in principle last for hundreds of years. >> i want us to be remembered for changing a lot of people's lives and making the world a better place. >> thank you so much. >> thank you for doing this. and being our guests on "studio 1.0." ♪
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>> welcome to a bloomberg special, "climate change and cities." over the next half hour, i talk to michael bloomberg, u.n. special envoy for cities and climate change, and oecd secretary general angel gurria. the titans go head-to-head on how best to tackle one of the biggest issues facing our generation. climate change is one of the topics we have been talking about recently. governments don't seem to be able to get a deal at all. why should we believe cities can make a difference when we cannot even reach a deal at the national level? >> governments do things that are in their interests. you have to be abl

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